EIS trading requirements

The Enterprise Investment Scheme (EIS) requirements include a requirement that the relevant company (or group company) commences a "qualifying trade" within two years of the date that the relevant EIS shares are issued (ITA 2007 s.174). This, and related trading requirements, have been considered in two recent cases, York SD Ltd v HMRC [2025] UKFTT 877 and Putney Power Ltd v HMRC [2024] UKFTT. In both cases, the FTT has held that the trading requirements were not met and provided important guidance on the commencement of a trade for tax purposes, concluding, in essence, that that a trade begins only when a business is "open for business", meaning it has assembled the necessary infrastructure and is ready to provide goods or services.

York SD Ltd case

This case involved a UK group which was set up with a view to construct and operate solar plants for electricity generation overseas. It raised monies through the issue of shares to finance this business, however, ultimately, HMRC rejected the contention that those shares qualified for EIS relief on the basis that the group had failed to meet the trading requirement within the necessary two year period. The taxpayer appealed to the FTT.

HMRC accepted that the activities of the parent and subsidiaries were genuine business activities, but argued that they amounted to no more than getting ready to trade.

Commencement of trade

The FTT took note of the FTT decision in Putney Power (despite the fact the decision was issued post the hearing in the York case) and agreed with the conclusions in that case.

Putney Power initially planned to build a combined heat and power plant but later shifted to developing a gas-peaking power plant. It entered into a series of contracts in May 2017, including agreements for the supply of engines, construction, gas and electricity connections, and a framework agreement for the sale and purchase of electricity and gas. However, construction was delayed, and the plant did not become operational until August 2018, after the EIS deadline. Although Putney Power had entered into contracts and incurred capital expenditure, the FTT found that it had not yet begun operational activities or put itself at real financial risk in relation to the supply of electricity by the deadline. The FTT concluded that the company had not commenced a qualifying trade by the statutory deadline on the basis that a trade begins only when a business is "open for business", meaning it has assembled the necessary infrastructure and is ready to provide goods or services. Preparatory steps, such as planning, contracting, or incurring capital expenditure, are not sufficient.

The FTT in the York case agreed with this approach. In this case, the activities did include entering into contracts (e.g. EPC agreements), securing sites, engaging contractors, and incurring substantial financial obligations prior to the EIS deadline. However, the FTT found they had not completed construction of the solar plants or the necessary infrastructure to begin generating electricity. "They were not yet, as HMRC argue, "ready to face and find customers"... We agree with HMRC that setting up a trade in a capital-intensive industry like solar energy generation requires the physical infrastructure necessary to carry out the trade to be in place. The subsidiary had not completed construction of the solar plant and had not conducted the necessary tests to ensure the plant could safely generate and supply electricity. We consider that the business infrastructure must be in place and functional to support the trade. A business cannot be said to have commenced trading if it is still assembling the tools or facilities necessary to deliver its goods or services."

In addition, the FTT did not accept the argument that because the taxpayer was in a position to enter into forward contracts to sell electricity they were planning to produce in future means that they had already begun trading. "Without completing the essential steps necessary to begin generating electricity, such as constructing the plant or completing safety tests, and therefore without the necessary physical infrastructure in place, we do not consider the subsidiary was in a position to begin trading by the deadline."

In making these assessments, the FTT also rejected the taxpayer's argument that, in assessing the existence of a trade, the legislation recognised the concept of a "deemed group trade" such that the activities of parent and subsidiaries should be treated as a single business. In fact, the legislation consistently refers to the trade being carried on either by the share issuing company or a qualifying subsidiary, but never both. In doing so, the FTT also rejected the argument that the terms "business" and "trade" in the legislation were used interchangeably.

In an attempt to initiate trading, the subsidiaries of York had installed a single rooftop solar panel in the UK. These installations were accompanied by agreements to sell electricity to homeowners and designed to satisfy the EIS requirement that trading must commence within the specified timeframe.

The FTT rejected the argument that these activities were sufficient. The FTT noted that the UK residential rooftop panels were not installed with a view to profit and were materially different from intended overseas solar plant activity. The scale, infrastructure, location, and technical expertise required for each activity were so distinct that they could not reasonably be considered parts of a single trade. In addition, by the EIS deadline, the trade was not being conducted on a commercial basis with a view to profit, as required by section 189(1)(a).

In conclusion, the FTT held that the rooftop solar panel installations were not conducted on a commercial basis or with a view to profit, the preparatory activities (e.g. planning, permitting, EPC contracts) did not constitute trading and the "deemed group trade" concept has no basis in the legislation. Neither the parent company nor the subsidiaries had not begun trading within the required timeframe.

Comment

The decision contains an important review on the case law surrounding the commencement of a trade for tax purposes and highlights that preparatory activities alone will not be sufficient. In addition, the carrying out of a token activity (here the installation of residential rooftop panels) on an uncommercial basis and with no intention to engage in such an activity on an ongoing basis was insufficient to commence a trade.

(It is perhaps instructive to note the difference with VAT where an "economic activity" will commence where a taxpayer carries out preparatory acts provided that it can be demonstrated that the necessary intention exists (in good faith) to make the relevant supplies based on the ECJ decision in Rompelman.)